Why the orderbook for crude tankers is negative for tanker stocks

The tanker orderbook represents managers’ assessment of the industry’s future fundamental outlook. It reflects the number or capacity of ships that have been ordered, as well as the number of ships under construction. When ship orderbook increases, it signals that future supply and demand dynamics are favorable and that companies can generate good returns. On the other hand, when ship orderbook falls, it reflects a negative picture for the tanker industry.

The crude tanker orderbook remains in a downtrend

The orderbook for crude tankers (which are used to haul crude oil, particularly from the Middle East to the rest of the world), throughout the week of September 9 to 13, rose from 9.58% to 9.59%. The increase is likely just a short-term bounce, though, and doesn’t reflect an overall turnaround in the orderbook index.

Background: Orderbook trends

The orderbook for crude tankers has remained in a downtrend since early 2011. At the time, the orderbook was at a high of ~30% of capacity. That meant if no additional vessels were ordered, shipping capacity would increase 30% from that date over the next couple of years. (Tanker construction can take up to five years, depending on the vessel class and size and how busy shipbuilders are.)

Managers were initially very optimistic about the future prospect of oil demand through 2005 to 2008, when oil prices were soaring and China was booming. So they placed large amounts of orders for crude tankers. What they failed to notice, though, was the eventual burst of the housing bubble around the world. Oil demand really didn’t recover after that.

Using percentage of existing capacity

Analysts often use a percentage to reflect the changes in the number of operating ships over time. An orderbook based on the number of ships has little meaning without context. If 12 ships were on the orderbook, the interpretation could differ when existing capacity consisted of 30 versus 1,000 ships. An orderbook also helps investors understand how much of existing capacity is currently in backlog and what percent of growth investors could expect if all the ships were constructed.

Implication for share prices

As long as managers don’t expect fundamentals to improve in the near future, they aren’t likely to place new orders. So investors should take the continued weakness in the orderbook as a negative for crude shipping companies such as Frontline Ltd. (FRO) and Nordic American Tanker Ltd. (NAT). This could also negatively affect Ship Finance International Ltd. (SFL) if Frontline Ltd. (FRO) can’t run its business.

While Navios Maritime Acquisition Corp. (NNA) also holds some VLCCs (very large crude carriers), its contracts mostly expire in 2017 later, so investors need not worry too much for now. The Guggenheim Shipping ETF (SEA) will also be negatively affected, but it has climbed higher this year because it’s diversified into other international shipping companies that have performed well, like shuttle tankers, LNG (liquified natural gas) vessels, container ships, and some dry bulk ships.

While the current orderbook continues to show a negative trend for crude tankers, investors should keep track of it because, sooner or later, orders will resume, as Chinese crude oil imports are expected to outpace declines in the United States.